Glencore’s massive plan to bust debt
If any more proof were needed of how the world’s largest investors have be e n sp o ok e d by t he commodity market meltdown, look no further than Glencore’s enormous $10.2bn (R142bn) debt reduction plans unveiled on 7 September.
Ivan Glasenberg, CEO of Glencore, said in an interview with Finweek that his company’s shareholders were worried metal prices could deteriorate further – a view he doesn’t personally hold – but one that is ref lective of broad market perception. As a result, Glencore is to cut debt to just above $20bn.
“We don’t think it [the market] will go lower. If it does, and we’re wrong, it can’t go that way for long because a lot of producers will then go cash negative and there will be closures. That is a doomsday scenario that I don’t believe will come,” he said.
Nonetheless, Glencore’s shareholders – some of whom are the largest investors in the world such as Legal & General, Capita l Research, a nd Nor way’s sovereign pension fund – insisted the company better its $27bn net debt target.
The outcome is a multipronged i nitiative t hat sees cash outf lows staunched by suspending the next two dividend payments (the f inal 2015 payout and the 2016 interim), capital expenditure cuts, asset sales, and a $2.5bn equity issue.
Steve Kalmin, Glencore CFO, said the equity issue could take a number of forms – “we have a dozen options” – ranging from a vanilla rights issue, to a book-build, or a convertible bond.
Whatever the route taken, the steps will be painful for investors as Glencore will both excise yield by cutting the div i dend while di l uting ex i st i ng shareholders’ issuing equity. “They [the debt reduction measures] are clearly designed so that the company can operate in current or materially worse market conditions,” said Barclays Capital, adding that Glencore would also hope to get “short-sellers off their back”. Shares in Glencore were 5% higher on the day of the announcement but at the time of writing are still 10% lower over the last seven days.
Glasenberg’s view that shareholders’ harum-scarum attitude to the market is unfounded is based on the notion that metal prices will respond to the basic shortage of metal as producers cut back.
“Just look at the copper cuts and the fall in grades. All this tonnage is being taken off the market, which will eventually have a positive effect on price,” he said, adding that although the world was predominantly negative about China, copper consumption had nonetheless increased by 2% to 3% this year while the group’s order book in China was “looking stronger in H2 [second half of the financial year]”.
Market f undamentals, however, seem to play second fiddle to the kind of investor sentiment that sent Glencore back to its debt reduction plans, especially in the platinum group metal market.
“I ’m not su r e i f a nyone does fundamental analysis anymore,” said Terence Goodlace, CEO of Impala Platinum (Implats), at the firm’s recent year-end results announcement. He was being somewhat facetious, but the exasperation is plain.
“There is a huge disconnect in what we are seeing with the prices and what is happening in the market. Of all our customers, not one has rejected any metal,” Goodlace said. “We do know that demand is going to be muted, but we still believe that there will be supply deficits in time.”
In the meantime, while the market remains in a funk over the extent of metal price weakness, short-sellers of mining shares are having a field day – one of the reasons why Glencore made its announcement, according to Investec Securities.
“There is a distinct smell of smoke in the air as Autumn is upon us in London and darker days mean a more distorted view in the shaving mirror,” said the bank. “We think that the Glencore move could be construed as a masterpiece of spin. [...] This plan appears designed to paralyse the short-sellers, and so far it appears to have worked.”
THE STEPS WILL BE
FOR INVESTORS AS GLENCORE WILL BOTH EXCISE YIELD BY CUTTING THE DIVIDEND WHILE DILUTING EXISTING SHAREHOLDERS’ ISSUING EQUITY.